Credit Repair vs. Debt Settlement

July 17, 2018Simon

While both can be welcomed beacons of light at the end of a very dark tunnel of despair, it’s important to understand the nature of credit repair vs. debt settlement. While both offer the potential to improve your financial situation, they operate under very different circumstances and only in rather specific situations.

What Is Credit Repair?

Credit repair companies endeavor to clean up your credit report and, in the process, improve your credit rating. This can get you better interest rates on future loans and may even have an effect on your employment opportunities and insurance worthiness.

These companies are governed by the Credit Repair Organization Act, which is enforced by the Federal Trade Commission. Under the tenets of the Act, companies must provide the following:

  • A written contract detailing your rights and the services to be performed.
  • A three day cancellation period with no charges.
  • Details on how long it will take for you to get results.
  • An accounting of all costs and fees.
  • Any guarantees that they are making through their marketing.

Credit repair companies are typically consulted when errors in your credit report are impacting your ability to qualify for loans. However, it’s important to note they can only help you with inaccurate information. Valid notations will remain on file regardless of the efforts of any organization you contract.

What Is Debt Settlement?

Debt settlement companies like Freedom Debt Relief negotiate with creditors to reduce the amount you owe when you can no longer make the minimum payments on your credit accounts. When you enter a program with such a company you’ll be asked to start a third-party held FDIC-insured escrow account the company can use to pay off your creditors in accordance with the terms of a negotiated settlement.

According to the Federal Trade Commission, debt settlement companies must inform you of the following:

  • Fees and conditions.
  • How long it takes.
  • Amount of money you must save before they can negotiate a settlement.
  • Possible negative consequences, like damage to your credit health.
  • Creditors may sue you or continue with the collections process.
  • Lenders may charge you additional fees and interest.

Additionally, you should be told the funds deposited in the escrow account are yours and you are entitled to any interest they earn. Further, you may withdraw your money from this account at any time without penalty (although it would create a problem in terms of completing the program).

Do It Yourself?

It’s entirely possible to conduct credit repair and debt settlement activities on your own. However, you’ll need to be prepared to spend a lot of time on the phone and writing letters. You’ll also have to get up to speed on whom to call and what to say when they answer the phone. Many people find it more convenient to hire firms who already have this experience as well as the relationships to work on their behalf.

When it comes to credit repair vs. debt settlement, keep in mind while each poses an opportunity to help you get your financial situation more firmly rooted, each serves a very different function. Credit repair helps you get your credit record straightened out, while debt settlement helps you resolve debt problems. Further, both industries can harbor less than honest individuals. Before signing with either type of company, ask questions based upon the information presented above to determine their veracity.

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